Is Your Worker Classified as an Employee or Independent Contractor?

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Whether a start-up or a longstanding company, hiring workers is an essential part of owning a business. The classification of your worker as an Employee or Independent Contractor has important implications, so it is critical to understand the difference.

Generally, a worker is as an Employee when the employer has the right to control the details of how the services will be performed. Essentially, the employer is in complete control of when, how, where and how the work is done. An Independent Contractor is one who is employed to do certain work, who employs his own labor and does the work according to his own ideas and plans, to whom the owner looks only for results of the work. The employer gives deference to an Independent Contractor on details as the focus is completion of the work.

The IRS has a 20-factor test to determine whether a worker is an Employee or Independent Contractor. The following chart summarizes how each of the 20 factors support the classification of Employee or Independent Contractor:

FactorEmployeeIndependent Contractor
InstructionsA worker that is generally required to comply with instructionsA worker that is granted autonomy regarding instructions
TrainingA worker required to receive special training from employer for the workA worker hired for their specialized training or skill
IntegrationWorker does work that is an “integral” part of the employer’s businessWorker does work that is less integral, even tangential, to the employer’s business
Services Rendered PersonallyIf services must be rendered personally, the employer likely wants more control over the workerThe employer permits the worker to delegate work
Hiring, Supervising, and PayingThe employer hires, supervises, and pays the worker directlyThe work is set up via contract, and the worker can hire, supervise, and pay other assistant-workers or subcontractors
Continuing RelationshipLong-term engagement between employer and workerShort-term or one-time engagement with employer and worker
Set HoursWorker has set hours of workWorker usually does not have set hours
Full Time RequiredWorker usually on full-time basis, restricted from other meaningful employmentWorker usually not restricted as full-time employee and operates on own schedule
Work Done on PremisesWork could be done elsewhere, but worker is required to work on employer’s premisesWorker has freedom to complete work anywhere (if possible)
Order or Sequence SetEmployer requires worker to perform work in a sequenceWorker not required to follow any sequence of work
Oral or Written ReportsWorker required to provide regular reportsWorker not required to submit updates or reports
Payments by Hour, Week or MonthWorker paid by hour, week, or monthWorker paid per job or straight commission
Payment of ExpensesEmployer generally pays worker’s travel or business expensesEmployer does not retain right to regulate business activities of worker
Furnishing of Tools or MaterialsEmployer furnishesWorker furnishes
Significant InvestmentEmployer provides significant investment for workWorker provides significant investment for work
Profit or LossWorker cannot realize the profit or suffer a loss from the workWorker who can realize the profit or suffer a loss from the work
Working for More Than One Firm at a TimeWorker that generally provides services for one businessWorker that generally provides services for multiple businesses at a time
Making Services Available to the General PublicWork generally not made available to the publicWork generally made available to the public
Right to DischargeUsually, the unrestricted right for employer to fire workerUsually, the right to fire worker must be with cause.
Right to TerminateWorker can terminate relationship with employer without incurring liabilityWorker will incur liability if work is terminated with employer

Under President Trump, the Department of Labor (DOL) issued a new rule on worker classification, which was withdrawn by the Biden administration. The rule would have given employers 2 primary factors in classifying workers: (1) the nature and degree of control over the work; and (2) the worker’s opportunity to earn profits or incur losses. Analysts and pundits believe the DOL’s rule was more employer friendly as it deemed two factors to be most important. The Biden administration’s revocation of the rule returns employers to the “economic realities test” which somewhat models the IRS 20-factor test.

Virginia Specific Rules

Effective January 1, 2021, Virginia applies the 20-factor IRS test in determining the classification of a worker as Employee or Independent Contractor under Labor and Employment Laws (including the Virginia Minimum Wage Act), the Unemployment Compensation Act, the Workers’ Compensation Act, and State tax laws. Workers are presumed to be Employees unless it is demonstrated that they are Independent Contractors. As mentioned, it is imperative that as a business owner you correctly classify your worker. Virginia employers that fail to properly classify the workers, and thus fail to pay the correct taxes, face a $1,000 civil penalty for the first offense, a $2,500 penalty for a second offense, and a $5,000 penalty for a third or subsequent offense.

North Carolina Specific Rules

There is no statutory definition for an Independent Contractor under North Carolina law. However, North Carolina courts have applied a “right-to-control” test for the last 60 years. Under this test, a worker is an Independent Contractor if he or she:

  • Selects his own time;
  • Is free to use such assistants as he or she thinks proper;
  • Has full control over those assistants;
  • Is engaged in an independent business, calling, or occupation;
  • Has the independent use of his or her skill, knowledge, or training in executing the work;
  • Is doing specific work at a fixed price;
  • Is not subject to discharge or termination because he or she adopts a particular method of work; and
  • Is not in the regular employ of the “employer” or contracting party.

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